Back in 2006 I purchased my very first real estate investment. It took about a year and half of reading all about real estate investing before I finally pulled the trigger on this first investment. This was by far one of the scariest life decisions I made. I did not have a mentor to show me the ropes. I was scared to invest. I had no help whatsoever with this other than the realtor I had found who specialized in working with investors. He helped guide me through the process but I took everything he said with a grain of salt knowing he was in it to make a sale. My original intention was to flip this house because all the reading material I had read was purely on flipping houses. It was just a matter of finding the right house and jumping in head first.
From what I recall, I spent about a month and half searching the MLS looking for potential properties not able to find one with decent numbers. My realtor sent me a possible candidate that was in a suburb of my local city. It was a foreclosure listed for 80k. I was also sent similar MLS comparisons for this neighborhood that were all in the 100k range. So immediately there was 20k in equity in this house which I sounded like a good deal to me. We went to view the house and was surprised to see the house was in great condition. It was a little dirty but that was it. It was a fairly newly built house and I did not see any damage anywhere in that house inside or out. I was very happy to see this and decided to submit an offer. We submitted the offer at list price 80k and it was accepted. Wow! I thought, I am going to be a real estate investor. Whooohooo!
Luckily, because of when I bought this house back in 2006 before the real estate meltdown I was able to get 100% financing on this investment property. The rate was quite high at 7.5% however I was able to roll in the closing costs and literally had not put any money down into this purchase. After the closing, I cleaned the whole house myself in and out and was ready to turn around and sell it for $100k. I was fairly naive about selling a house and was not aware of all the fees that come with selling a house. My realtor shined the light on me and explained how I would pay 6% realtor fees and have to pay short-term capital tax gains. After running these numbers this deal was not looking so good. I was a little bit heart-broken from it but over all knew I could still make a tiny bit of profit and the learning experience was tremendous.
I was however determined to find another way in which I started reading all about selling via owner finance. I had a mortgage on this house so what I was really reading about was called a wrap around mortgage in which the seller sells the house via owner finance while retaining the original mortgage. So the new buyer pays you (the lender) the new mortgage amount, then you use part of the proceeds from that payment to pay your underlying mortgage. As long as you both make the payments on time, there should be no problem. The reason why this sounded so good to me was because there were no realtor fees involved. I could profit more from the owner finance because of the monthly cash flow.
Well as I indicated above, being naive and new to all this I went ahead and sold the house via owner financing without ever thinking about how this would affect me in the future. The house actually sold in days by just listing it on craigslist. I sold it for 105k with 3% down payment at a 9% interest rate and a 30 year term. I used the 3% down payment to pay all the lawyer fees involved with setting up the proper documents. I was smart enough to know that I needed a good real estate investor lawyer that specialized in owner financing and wrap around mortgages. I found one and was confident if I did this, it would at least be done properly from a legal perspective.
Now that I look back, there is no way in h. e. double hockey sticks I would ever do this again. There were so many risks involved with this deal and I just didn’t think of how many ways this deal could go bad. I was not making a ton of money at the time and if the new buyer ever missed a payment, I would have no way of being able to make my mortgage payment which would have destroyed my credit as well as risk even being foreclosed on. Not to mention, if my lender ever discovered I sold the house, they could trigger the due on sale clause in which would have also ended up in foreclosure.
Fast forward >> I am extremely lucky even to this day. Its been 9 years that I’ve had this note and the due on sale clause was never triggered, my buyers have never been late on a payment. I still collect the mortgage payment each month from them and am making passive income from it. The cash flow is minimal at around $110 per month but considering that I made this happen with no down payment, this means infinite ROI. I also still have some equity that I will see one day which is the difference between what I owe the underlying mortgage and what my buyer owes me in principle. So if the buyer ever refinances the loan I will get that money. Or if I ever sell this note, I could see that money depending on how much I sell the note for.
My plan for this note now is to eventually get rid of it. I do not want to carry it anymore because I want that equity I have in it so that I can buy another rental property. The $110 cash flow I get from this note is not enough and its taking up a mortgage on my record. I can make more passive income from buying a rental property so that is what I would rather do. You can only have a max of 10 conventional mortgages in your name and eventually I need to free this one up to make more money. I have tried to get my buyer to refinance and he just wont do it. He always says he will not qualify even though I’ve told him numerous times it does not hurt to at least try. Especially with the rates so low now its really a no brainer. It would be a win win for everyone. He would get a smaller mortgage payment and I would get paid and free up my mortgage.
I’m contemplating selling this note to another investor. This would make for a great performing note for someone else who will not have the underlying mortgage to deal with like I do. Someone can easily make 9% returns and I have all the documents and proof to back up the performing note. With this being said, when I do sell this. I’m looking at selling this puppy at par which is the amount that the buyer currently owes me in principle. If you are interested in purchasing this note from me, shoot me a message and lets talk.
I’m taking my sweet time on selling this note because I have no pressing need to sell it right now. When I do sell it, I’ll write all about it so keep an eye out for future posts.
Here are the numbers from a note perspective.
As indicated, not great numbers but it is technically infinite ROI since I never spent anything out of my accounts. Keep in mind although this is the story of how I created a self-generated performing note, by no means am I or would I recommend anyone to do a deal like this unless you have a ton of experience and know exactly what you are doing the risks involved.